It's becoming more common than when it was introduced (and at the same time maybe less common than it used to be, now that OpenID is becoming more popular) but it's still a significant hit to one's form-filling experience. And annoying someone right when they're signing up/otherwise about to breach a significant barrier is a great way to stop people who would have otherwise gone through to become customers. Every extra step you add will lose people, even moreso when the step is (intentionally) annoying.

And no captcha conversation is complete without noting how terrible "accessible" captchas are. Homebrewed captchas are often completely inaccessable to the blind, and audio captchas, when offered, are often vastly harder to solve. Try a few yourself. Also note most alternatives to captcha simply take longer than a captcha and are thus more annoying, and generally are no more accessible (at best).

Generally you should use a honeypot instead of a captcha and only consider additional methods if the honeypot isn't enough. OpenIDs are a good way to ensure you're getting a person (or at least a significantly smarter bot), but honeypots are more versatile since not every situation should require an open ID; certainly not for a contact form.

As CAPTHCHAs have become something usual, the annoyance tend to be diluted, because they became expected (there is a good talk about that here). The user does not feel interrupted anymore (or not as interrupted as the first user that saw a CAPTCHA felt). That said, any extra step imposed to the user is a bad thing and may become reason of abandonment. And that is why we need to be careful when charging users with internal needs or problems.

In my own experience, I feel frustrated and will abandon the page if the CAPTCHA is really difficult to read, and I am not able to decipher it after a few tries. So, we may say that the UX for a CAPTCHA is a subject by itself: how to let the user show he is human in a simple, elegant, non-intrusive way?

And one of the answers for this problem nowadays are the identity management services (Facebook Connect, Google accounts, Twitter, Open ID, WordPress account, etc.), that let us login with our users that were already verified by the third party, all with just one click. In fact, it will be a good experiment to add those options to your form as a way to override the CAPTCHA and then see what the users tend to chose.

Yes, CAPTCHA has a huge effect on UX. A number of sites have experimented with this, and most have reported an increase in conversions of 3-33% when removing CAPTCHA.

That doesn't mean that CAPTCHA has no place. You still have to evaluate the technical merits and spam protection needs of your product / service and decide what makes the most sense for you. However, I would try look into the many CAPTCHA alternatives out there and use CAPTCHA as a last resort.

I personally dislike Captchas, or atleast the generic type (where the user has to type in a barely recognizable word or a sequence of letters/numbers.)

Captchas will certainly increase your drop rate. They are comparable to stone walls standing in front of a user and asking them to climb over it. However, that doesn't mean the all Captchas are the same.

If the whole point of having Captchas are to prevent spam bots from getting through, it makes more sense for Captchas to ask the user to do something simple that anyone can understand, but hard to replicate in a program.

In my last company, they inserted a Captcha that had a combination of simple questions, "What is this animal/color/etc" that worked quite well. It was much less of hassle than the conventional Captchas and it affected the drop rates only by a small percentage.

I've also read an article about mini game captchas. Not sure how affective they are, but it's good to see people thinking outside the box. Venturebeat.com